Patterns and weapons — Learn charts

When a shape appears and price crosses the line, check once more with the game’s weapons whether there are other reasons behind the breakout. In this lesson, real charts show how to confirm with the breakout candle’s volume (volume and volume MA), candlestick pattern weapons at the breakout point and moving averages, and how to decide where to get out before getting in. We also look at a wrong example that clearly crossed the line but collapsed without volume behind it, and the order for finding patterns in one match. This is the last lesson.

Adding reasons to the shape

The shapes in lessons 1–6 are lines you draw by eye. Looking at the same chart, different people draw slightly different lines, and false breakouts that cross a line and come back were common. So when a shape appears and price crosses the line, check once more whether there are other reasons along with it.

This lesson looks at three such reasons: the volume of the breakout candle, the candle shape at the breakout point, and the moving average. All three can be put on the chart as weapons in the game. A confirmation is not a promise that you are right. Use it to add reasons to get in, and to set where you get out if you are wrong.

The volume of the breakout candle

The volume of the breakout candle is read with the two starter weapons from Basics lesson 4, "Volume and volume MA". When a volume bar shoots well above the volume MA, more trading than usual piled into that candle.

If trading piled into the candle that breaks the line, it is read as many people buying and selling at that price and taking part in the breakout. If price only crosses the line with volume the same as usual or lower, read it as a breakout with less force behind it and keep watching.

Volume does not tell you the direction. Volume piling up on a downward breakout means the same thing, as in the chart below. Use volume to see "was there force behind the breakout", and use whether price closed outside the line to see which way it went.

Drag the chart sideways with a finger or the mouse to move it, and pinch with two fingers to zoom in. With a keyboard, click the chart, then use ←/→ to move and +/− to zoom.

Charts by TradingView Lightweight Charts™

100 daily candles of one stock. After falling in several steps, from around candle 50 the price moved inside a narrow box. Inside the box, the volume bars were mostly near or below the moving average. The candle just before candle 80 rose above the box during the day and closed near the upper line, but candle 80 opened well below the floor of the box and closed even lower. This candle’s volume was more than six times the average of the previous twenty candles, and the next candle, a long bearish candle with almost no wicks, fell further on volume more than twelve times the twenty-candle average. After that the price never came back near the box.

There is no short selling in the game, so a downward breakout is used to decide "sell if you are holding" and "do not buy new".

The candle shape at the breakout point

Candlestick pattern weapons look for shapes of one to three candles and show a marker. The shapes are small, so markers pop up all over the chart: in the double bottom chart below, too, there are long bullish candles with almost no wicks in several places other than the breakout. So a marker on its own is not a reason; count only markers that appear at the point the pattern points to.

There are two such points. One is the breakout candle itself, and the other is the last low or peak before the breakout. A marker at the last low is still inside the line, so it is a "reason to wait"; the confirmation is a close outside the line.

These are candlestick pattern weapons worth watching at such points. The detailed shapes and the game’s rules for spotting them are on each page of the indicator dictionary.

Bullish Marubozu — A bullish candle with a long body and almost no wicks. If the candle breaking out upward has this shape, it is read as buyers pushing all the way through that candle.
Bearish Marubozu — A bearish candle with a long body and almost no wicks. If the candle breaking out downward, or the one after it, has this shape, it is read as sellers pushing hard.
Bullish Engulfing — At the end of a fall, a bullish candle whose body completely covers the body of the bearish candle before it. Look for it at the last low of a bottom pattern.
Morning Star — Three candles in a row: a long bearish candle, a candle with a small body, and a long bullish candle. Look for it at the last low of a bottom pattern.
Bearish Engulfing — At the end of a rise, a bearish candle whose body completely covers the body of the bullish candle before it. Look for it at the last peak of a top pattern.
Evening Star — Three candles in a row: a long bullish candle, a candle with a small body, and a long bearish candle. Look for it at the last peak of a top pattern.

The moving average

The moving average (Basics lesson 3, "Moving averages") shows which way the trend is going. If a candle breaking out upward is above a rising moving average, the trend and the breakout point the same way. If the moving average is falling and only the price has crossed the line, it is a breakout against the trend, so wait for more confirmation.

A moving average is an average of past prices, so it lags behind. After a breakout candle with a big rise, a gap opens between price and the moving average, and price often comes back toward it. Use the moving average to see "does the breakout go against the trend", and do not buy and sell every time price crosses it.

In the chart below, volume, candle shape and the moving average together added reasons at the breakout candle. Looking at the neckline alone, it was an unclear breakout.

Charts by TradingView Lightweight Charts™

This stock hit lows at the same height at candles 62 and 76 (the double bottom of lesson 3). There are lower candles further left on the chart, but the shape we are looking at is these two lows. The candle at the second low was a bullish candle with no lower wick that rose a long way from its open, but its volume was low and it was still well below the neckline. After that, the candle just before candle 80 and candle 80 rose in a row as long bullish candles with almost no wicks, and candle 80 closed above the neckline. The close was just above the neckline, so looking at the line alone it was unclear, but this candle’s volume was more than four times the average of the previous twenty candles, and the price was well above the rising 20-candle moving average. After that, two candles closed just below the neckline, but none closed below the breakout candle’s low, and the price rose further for a while, well above the breakout candle. Near the end it had come back down near the neckline.

Decide where to get out first

Even with confirmations in place, a breakout can be wrong. So before buying, first decide the point where you will consider "this breakout was wrong". Which line to use was covered for each shape in the earlier lessons: a close below the neckline, a close below the lowest point of the flag, and so on.

A line is a band, so right after a breakout it is common for price to come just inside the line for a candle or two. In the double bottom chart above, too, price closed just below the neckline twice after the breakout. Had you used the exit from lesson 3 (a close back below the neckline) as it is, in this chart you would have got out with a small loss on the very next candle after the breakout and missed the rise that followed.

Another way is to set your exit at a close below the opposite end of the breakout candle: for an upward breakout, that candle’s low. In the double bottom chart above, the last candle did come down to that height during the day, but no candle closed below it to the end. This point rides out the wobbles near the line and lets you hold longer, but the longer the breakout candle, the further away it is, and the bigger the loss when you are wrong.

Neither one is set as the right one, and you do not need just one exit. What you choose depends on your temperament as an investor. If keeping losses small comes first for you, use a close below the neckline: you get out early with a small loss, but you also often miss breakouts that turn out right. If you can sit through the wobbles to aim for a bigger move, use a close below the breakout candle’s low: you hold on longer, but lose more when you are wrong. What matters is deciding which one you will use in this match before you get in.

A wrong example: a breakout without volume

Breaking a line does not always mean the move continues. In the chart below, price clearly crossed the upper line of a bull flag, but volume did not back it up. It is the opposite of the double bottom chart above, whose breakout was unclear when looking at the line alone.

Charts by TradingView Lightweight Charts™

From around candle 62, this stock rose steeply within a few candles, and while the pole formed, volume soared to tens to hundreds of times that of the candles before it. After that it rested for about ten candles, drifting slightly down in a narrow band (the bull flag of lesson 4). Candle 80 closed clearly above the upper line of the band, but this candle’s volume was not even half the volume MA, it was about the average of the candles inside the flag, and four candles inside the flag had more volume than it. The next candle held above the upper line, but the candle after that fell hard in one day and closed back inside the flag, below the breakout candle’s low. After that the price never got back above the breakout candle’s high, and near the end it had been pushed down near the lowest point of the flag.

Why it went wrong

Volume did not back it up. In this chart, the volume MA had been dragged high by the huge volume of the pole. Even setting that aside and comparing with the candles inside the flag, the breakout candle’s volume was about the flag’s average, and four candles had more. You could not say trading had piled into the breakout candle.
Getting out at the point you set did not make the loss small either. Had you set your exit at a close below the breakout candle’s low, you would have got out two candles later, with a slightly smaller loss than holding to the end. With the exit from lesson 4 (a close below the lowest point of the flag), you would never have got out, and price stayed near that point. An exit only sets where the loss ends; it does not make the loss go away.
What would have avoided this loss was the check before getting in. Had you waited after seeing that volume did not pick up, the later candles that closed back above the extended upper line also had volume that did not shoot well above the moving average, so a point to get in never came at all.

Finding patterns in a match

When a match starts, you look at the first 60 candles for 5 seconds, and after that candles come in one at a time. Here is the order for using what you saw in lessons 1–7 in one match.

Find a big shape in the 60 preview candles — Look at the big shape rather than at each candle. Near the end, check whether one of the shapes from lessons 1–6 is forming, such as lows or peaks at the same height, a narrowing triangle, a box, or a pause after a big move, and draw in your head the lines that matter if they break (a neckline, the upper and lower lines). If there is no clear shape, do not force one.
Check the breakout as candles come in — As candles come in, wait for a close outside that line. Going over briefly during the day does not count as a breakout. A close right near the line is still inside the band and unclear; this is where the weapons in the next step help.
Confirm with weapons — Check whether the breakout candle’s volume shoots well above the volume MA, which side of the moving average the price is on, and whether a candlestick pattern marker appeared at the breakout point. Not all three have to line up, but if there is none, choose to watch rather than get in.
Decide where to get out first — Before buying, decide where you will get out: the exit from that shape’s lesson, or the opposite end of the breakout candle. If you cannot decide, it is not yet time to buy.

What you see	A common response
The volume of a candle breaking out upward shoots well above the volume MA	Read it as force behind the breakout and treat it as a place to buy. Set your exit first.
Price crossed the line, but volume is below the volume MA	Do not buy right away; keep watching. Check whether the next candles hold outside the line and whether volume picks up.
Volume piles up as price breaks out downward	If you are holding, treat it as a place to sell. Do not buy new.
A marker such as an engulfing pattern or a morning star appears at the last low	It is still before the breakout. Use it only as a reason to wait and see whether price crosses the line. If you want to get in early, set a close below that low as your exit.
Price breaks out upward while below a falling moving average	Read it as a breakout against the trend. Do not rush until more confirmations line up.

Common ways patterns go wrong

Breakouts without volume: a breakout that only crosses the line without trading picking up sometimes came back inside the line, as in the wrong example above. Wait until volume picks up, or do not get in.
The volume MA after big volume: if there were candles with big volume spikes just before, the moving average has been dragged high. The wrong example above is like that. Do not compare only with the moving average; compare with all the candles inside the flag (the pause). Looking only at the two or three candles just before, even the wrong example above seems to have picked up trading.
False breakouts: a candle that went over during the day but closed inside the line does not count as a breakout (lesson 1). Wait for the close.
Candles that jump past your exit: like the breakout candle in the box chart above, some candles open far below the candle before. Then you end up getting out at a lower price than the point you set. Such candles often come from news outside the chart and cannot be seen in advance from the shape.
Forcing a shape to fit: if you decide first on the shape you want to see and fit the lines to it, you will see patterns everywhere. If there is no clear shape in the preview candles, it is fine to follow the trend with the starter weapons in that match (Basics lesson 6).
Many confirmations can still be wrong: even when volume, candle shape and the moving average all line up, they do not predict future prices. Confirmations only add reasons to get in; always set your exit separately.
Trade count: a match allows up to 10 trades (a buy counts as one and a sell counts as one). Picking only breakouts with confirmations in place also saves trades.

That is the end of the advanced course. Try the order for yourself in a few matches: find the shape, wait for the breakout, confirm with weapons, and decide your exit first. What each weapon is for is in the indicator dictionary.